Reputation of Insurers in the Term Paper

Excerpt from Term Paper :

" China's undeveloped market limits investment returns potential and express insurance to a risk in investment. (Beijing Review, 2005) A plan for compulsory malpractice insurance was stated by the Beijing Insurance Regulatory Committee in June 2005 under a directive requiring all state-owned non-profit making medical organizations to have coverage under medical mal-practice insurance.

Interim rules were also reported to be set for allowing insurance funds to enter the stock market. Those were stated to be: (1) The specific proportion for insurance institutional investors to invest in stocks; (2) The basic criteria for measuring the performance of the stocks to be invested before insurance organizations invest in the stocks; (3) The contents of related statements and reports for stock investment and the way for being reported to the authorities; (4) And the administrative rules on independent seats for stock trading, as well as a guide for custody of stock assets of insurance companies.

A. The Reputational Risk

Damage and destruction to the reputation of an insurer conducting business in emerging markets requiring that bonds in the form of bid bonds, performance bonds, prepayment bonds and retention bonds is the characteristics of those in the insurance industry. Arbitrary bond calling exist in circumstances such as civil war. Wrongful Calling of Guarantee insurance indemnified a company for the value of the bond that was called as a result of:

1) A wrongful call of the guarantee by a government entity

2) A private entity calling the bond due to a political event (known as a rightful call of guarantee).

There exist instances in which making a Wrongful Calling of Guarantee Insurance is necessary for instance according to the CHUBB website the following scenario:

U.S. pharmaceutical company has manufacturing operations and contracts in a country that is invaded by a neighboring country. The company's operations and contracts in a country that is invaded by a neighboring country. The company's equipment is lost due to acts of war and is unable to recover assets from the country. As a result, the company's contracts cannot be completed and payment will not be received. The irrevocable letters of credit the company posted as a bond for its performance may be called at any time." (CHUBB website, 2005)

Further a risk exists when companies buying from vendors or that are selling to clients in markets that are emerging specifically, those outside of the United States, Canada and Western Europe experience exposure to risks of a various nature. Those risks are confiscation, expropriation and nationalization of assets; willful destruction of assets; passage of new laws that make the business environment unfriendly for foreign investors; loss of permanent or mobile investments/assets due to acts of government; currency inconvertibility or transfer; political violence; deprivation; forced abandonment; forced project relocation; forced divesture; selective discrimination; and third party blockades.

Finally a risk exists in the form of broken contracts due to the fact that contracts in sales and trade in emerging markets often fail to remain intact. Contracts involving companies that cross borders become invalid or unfulfilled due to 1) Trade embargoes

2) Import/Export license cancellation;

3) Inconvertibility or transfers of currency;

4) Unilateral termination of contracts by governmental entities; and 5) Non-payments by a government buyer or private company.

B. Insurer Vulnerabilities

The insurer becomes vulnerable when the laws in one country do not adhere with the laws of the overall normative legislation on a global scale. Differences exist in market legislation within countries that are not fully entered into the global business environment. This is true of China's legislation related to insurance legalities thereby creating an inherent risk for companies that are insurers within the country of China.

C. Damage and/or Destruction to Reputation of Insurers

Wrongful calling of contracts is one illustration of how an Insurer's business reputation might be either damaged or destroyed. Failures to pay claims that are deemed payable legally within the limits of the contract or policy have the potential to damage and destroy the reputation of the insurer. Some countries have experienced more than their share of such troubles. For example the United Kingdom has witnessed repetitive destruction of the public's faith in insurers. Consider the fact that the business or individual who has failed to receive payment on a claim under the terms of an insurance policy, and who purchased that self-same policy from the insurer who fails to fulfill their policy requirements as stated at the time of the purchase of insurance is disgruntled, has completely lost faith in the company and as well may be financially damaged or even destroyed for all intents and purposes.

For instance, a company has paid large premiums for the coverage of their property from damage and destruction. It is the understanding of the company that they are covered under all types of natural disasters. Alas, it is only after total destruction of the business that they learn they were misled at the time of purchase thereby leaving forever a bad aura over the reputation of the insurer. It is vital that the insurer realize their inherent responsibility in providing the customer, whether a business or individual, with effective counseling and assistance in choosing the policy that suits their needs and expectations. Over- and under- projected policy coverage will ultimately disconcert the relationship between the company and the customer. The only outcome that can be anticipated in this instance and many others akin is the reduction of the confidence in the insurer reputation in the opinion of the customer.

The Elements and Factoring Influencing and Characterizing the Reputation of Insurers in the UK and China

Chapter 2

UK insurers

The UK has been experiencing "the confluence of an avalanche of regulations and low-growth-low-inflation economic environmental conditions which is being driven by regulation. The larger diverse companies with more capital strength have an advantage over the smaller organizations. Predicted is the "consolidation amongst intermediaries with transactions being "drive by new capital regimes" inclusive of more cross border competition." Stated as being 'key' is "the alignment and balancing of investment and operational activities around the three Cs- Capital, Cost and Customer.

"Plethora of regulatory change which is imposed on an unprecedented scale with different drivers generating significant overlapping and interdependent impacts on various functions of the business" is that which the insurers face. Furthermore, each regulatory driver has significant costs associated with it, with real impact on the business and infrastructure....and effects on the business strategy including the core markets which are serviced. "

In the figure below illustrated are the changes that are presently driven by the UK insurance market and those which are driven by the International Insurance Market.

UK driven changes Aspects

Prudential Sourcebook (PRU) Capital adequacy, systems and controls

Conduct of business General insurance distribution,

Regulations (COBS) Mortgage distribution

Treating Customers Fairly From strategy down to day-to-day dealings with (TCF) customers

Pensions regulation Pensions Act 2004

International changes Aspects

Solvency II Capital adequacy

International Financial Accounting standards across all businesses, reporting standards (IFRS) insurance specific standards

Sarbanes-Oxley (Sarbox) Impacts on systems and controls and responsibility of directors

The following figure illustrates the regulatory timeline in the UK insurance market.

Regulatory timeline

2004 2005

Mortgage Insurance COBS Pensions PSB

COBS Capital act


TCF arrow

Visits commence

PRU Capital


Systems and controls

Sarbanes-Oxley Legislation was passed in 2002.

Solvency II implementation due in 2008.

Problems and Difficulties in the UK Insurance Industry

There are many typical cases in the UK market, with an unprecedented combination of company collapses, poor financial performance, broken promises and mis-selling scandals. 2) Lack of reputation leads to lack of customer, which is caused by the natural of the insurance business. Insurance is intangible, complex and poor understood by most customers, particularly retail consumers. The value propositions offered by the insurer are clearly not full appreciated. The industry can be its own worst enemy with too much emphasis focused on price, with little attempt to explain variation in cover, conditions, service or security.

The Elements and Factoring Influencing and Characterizing the Reputation of Insurers in the UK and China

Insurers in China

Chapter Three

The Chinese Insurance Market

Over the past two decades China's insurance industry has experienced rapid and expansive growth. As illustrated in Figure 1, the insurance premium between the years of 1980 and 1999 increased from 460 million RMB to 139.32 billion RMB which is an average of 35.1% per year while China's GDP growth rate in the same period was only about 9%. China's insurance market is one of the largest emerging in the world. The following table shows from 1980 to 1998 the Insurance premium rates in China (100 million RMB, nominal price)

China's insurance premium (1981-1999)

100 million RMB, nominal price)



Source: Qixiang Sun, "Development, reform and opening of China's insurance industry," working paper, 1999 as cited by Wu & Zheng (2000)

Rapid expansion of the insurance industry has resulted in the Chinese government being required to put forth great efforts toward the establishment of laws and regulations for effective market management.…

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